China’s real estate bubble continues to deflate, though there are some hopes that while the decline might be sharp, it can also be managed. Home prices slid by .47 percent in June, compared with .15 percent in May as real estate developers have been slashing prices to attract buyers. Regardless, June prices were still up 4.05 percent in June on a year over year basis.

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China’s real estate market has become a chief concern among economists and analysts. As the world’s second largest economy, China is now an integral engine of growth for Asia and the global economy at large. Last May’s decline itself was a huge rebuke for the Chinese economy, marking the first month-to-month decline in over two years. And now it appears that the drop in prices is only accelerating.

Decline In Prices Across the Board

Average new home prices declined in 70 some different cities, suggesting that the decline is national, not regional. Real Estate is estimated to account for 20 percent of growth in China and the consumption of steel, cement, labor power, and other inputs helps drive the economy. With real estate related consumption slowing down, economic growth itself will be constrained.

Some believe that the price cuts have just started and that things will get worse. Many buyers will likely wait out until more substantial price cuts are offered. With so many real estate developers sitting on unsold properties, it’s a buyers market. Some analysts even believe that the trend of cutting prices could last as long as a year.

Overall, housing sales nation-wide are down an alarming 9.2 percent, YOY. Real estate developers are now facing tight credit with banks looking to lower their exposure to the market. This leaves the sale of real estate units as the best way to raise capital. With buyers not biting on offers, however, they are being forced to cut prices, and thus any potential for profits.

China’s Government May Be Forced To Reconsider “Hukou”

China uses a “Hukou” system that essentially requires Chinese citizens to acquire city-level citizenship before being allowed to buy local homes. Indeed, even moving temporarily to a city can require a sort of visa. With so few people buying homes, however, the government may be forced to lift these restrictions, at least for wealthier buyers.

Doing so might increase investment by people who lack the proper hukou requirements. The number of eligible buyers would certainly increase, and this alone could lead to increased demand. For now, however, the government has not indicated that it is ready to reform said system.